Fed meeting to "close the books" in 2025: The big shock may not be in interest rates

(Dan Tri) - The market almost assumed the Fed would lower interest rates this week, but seasoned investors are holding their breath waiting for another trigger from the $6.5 trillion balance sheet.

Wall Street is preparing to close out a turbulent 2025 with a crucial week, with all eyes on the Federal Reserve’s final policy meeting of the year on December 9-10.

While the public debates whether the Fed will "give a Christmas gift" with a rate cut, smart money is seeing a much more interesting and important story: The return of liquidity.

When interest rates are no longer the "trump card"

If you only look at the surface indicators, the scenario for next week's meeting seems to be set. According to the market monitoring tool, there is a 90% probability that the Fed will cut interest rates by another 0.25 percentage points, bringing the operating interest rate to the range of 3.5-3.75%. This is considered a necessary action when the US labor market is sending out "cry for help" signals.

The latest report showed the private sector cut 32,000 jobs in November, a "canary in the coal mine" warning of a weakening real economy .

However, Michael Kelly, global head of multi-asset investing at PineBridge Investments, which manages more than $215 billion, offered a provocative perspective: "Interest rate policy no longer seems to have any real impact."

According to this expert, the US economy is operating according to the K-shaped model with two parallel realities. On one side is the interest rate policy that is weighing down small businesses and low-income people - groups sensitive to borrowing costs. On the other side is the "balance sheet policy", which is doping the wealthy class, helping the stock market to flourish despite high interest rates.

The paradox has been proven: The S&P 500 just closed near its all-time high of 6,870, up nearly 17% year-to-date. The market’s euphoria, fueled by AI hype and expectations of mega-IPOs like Anthropic’s (which is valued at $300 billion), suggests that high interest rates aren’t enough to cool investor sentiment.

A third rate cut this year is almost inevitable, but any signals regarding the Fed's balance sheet plan are really key (Photo: Getty).

"Pipeline maintenance" or underground money pumping signal?

The core and most anticipated issue at next week's meeting is not the 0.25% number, but the Fed's direction towards the huge $6.5 trillion asset in the balance sheet.

Since December 1, the Fed has quietly paused its asset reduction after signs of stress in the overnight lending market, a nightmare for monetary authorities, as they do not want to repeat the liquidity crisis nightmare that happened in 2019.

Analysts at BofA Global predict a bold scenario: the Fed could announce plans to buy Treasury bills with maturities of less than one year, starting in January 2026 at a pace of about $45 billion a month. Roger Hallam of Vanguard is more cautious, predicting a figure of $15-20 billion, and coming later.

While Fed officials, as usual, will call this a technical “reserve management” operation to keep the system running smoothly, to financial markets it is a signal of quantitative easing. Any move that suggests the Fed stops withdrawing money and starts pumping liquidity back in would be a powerful catalyst for stocks and risk assets.

"Will the Fed keep its balance sheet flat or start expanding again? That's the billion-dollar question," Michael Kelly stressed, also expressing confusion about the Fed's enthusiasm to expand its balance sheet but its reticence to cut interest rates.

Global domino effect

A paradox is playing out in the bond market: Even as the Fed prepares to cut short-term interest rates, the yield on the 10-year Treasury note has jumped to 4.14%, suggesting that the market is worried that long-term inflation is still a lingering specter, or that the economy's real borrowing costs won't fall as quickly as expected.

The Fed's decision early Thursday morning (Vietnam time) will be the starting gun for a series of major central banks around the world in the "Super Week".

European Central Bank (ECB): Likely to keep interest rates unchanged as Eurozone inflation remains hot (2.2% in November) and services inflation persists.

Bank of Japan (BoJ): Going against the world trend as it prepares for an interest rate hike. Japanese bond yields have hit their highest level since 2007, signaling the end of the era of cheap money in the land of the rising sun.

Central Banks of Canada and Switzerland: Expected to keep interest rates at current levels.

This week’s meeting will not only mark the end of fiscal year 2025, but also set the “rules of the game” for 2026. If the Fed does signal liquidity support through bond purchases, the market could see a Santa Claus rally despite concerns about high valuations.

Investors need to be cautious, however. "It's just a technical action, not a change in policy stance," warned Roger Hallam of Vanguard. A misunderstanding of the Fed's signal could lead to over-excitement and a correction risk when the reality is not as rosy as expected.

As US politics enters a transition period with much speculation about Mr. Powell's successor under President Donald Trump, uncertainty remains the only constant.

As Michael Kelly put it: “I’m pretty optimistic about next year, but if it were me, I’d run the opposite way the Fed is doing right now.” That leaves open the possibility that the Fed is right, or it’s wrong, and the cost won’t be clear until 2026.

Source: https://dantri.com.vn/kinh-doanh/fed-hop-chot-so-nam-2025-cu-soc-lon-co-the-khong-nam-o-lai-suat-20251207210610299.htm